After the Liberal Democratic Party and its ruling partners suffered heavy losses in the election, the Japanese yen exchange rate fell to a three-month low on Monday (October 28), with the USD/JPY hitting a high of 153.69,; The Japanese stock market also experienced a decline at the opening, and then reversed the downward trend.

The 50th House of Representatives election in Japan began voting on October 27th local time, with a total of 1344 candidates competing for 465 seats in the House of Representatives. The ruling coalition of the Liberal Democratic Party and Komeito Party in Japan failed to secure a majority of seats in the House of Representatives elections held on October 27th, posing a threat to their political power.

The election for the House of Representatives of the Japanese Diet is held every four years, and the term of office of the current members of the House of Representatives was originally scheduled to expire in October 2025. On the 1st of this month, Shigeru Ishiba was elected as the new Prime Minister of Japan. On the 9th, he announced the dissolution of the House of Representatives, setting a record for the fastest dissolution of the House of Representatives after a post-war Prime Minister was elected.

The final election results showed that the top three political parties with the highest vote share were the Liberal Democratic Party with 191 seats, the Constitutional Democratic Party with 148 seats, and the Japan Restoration Party with 38 seats.

The Japan Broadcasting Corporation (NHK) reported that the ruling coalition won a total of 215 seats, including 191 for the Liberal Democratic Party and 24 for the Komeito Party, failing to exceed half of the 465 seats in the House of Representatives. The Liberal Democratic Party won 191 seats, a decrease of 56 seats from 247 before the election.

The Constitutional Democratic Party has become the second largest force in the Japanese House of Representatives after the Liberal Democratic Party. The leader of the Constitutional Democratic Party, Yoshihiko Noda, said, "Our goal is to make the ruling party lose its majority, so this is a major achievement." Yoshihiko Noda plans to start a "sincere dialogue" with political parties that do not want the Liberal Democratic Party to continue in power on Monday.

On Monday morning in the Asian market, the USD/JPY fell by 0.9% at one point. Previously, the Japanese yen had been falling for four consecutive weeks. Analysts say this once again increases the risk of authorities returning to the market to protect the yen.Although the depreciation of the yen usually supports the Japanese stock market, investors are concerned that political stability will call into question the position of Japanese Prime Minister Shigeru Ishiba.

Tadashi Matsukawa, head of fixed income management at PineBridge Investments Japan Co., said, "The initial reaction will be a drop in stock prices and a depreciation of the yen." Matsukawa added that bond yields may decrease.

Tim Waterer, Chief Market Analyst at KCM Trade in Sydney, said, "The election results may put the legislative process in a difficult position, at least in the short term, which may not be a good sign for the Japanese yen and Nikkei index

In this year's Group of Ten (G10) currencies, the Japanese yen has been the worst performing currency, depreciating by over 7% against the US dollar.

The weakness of the yen largely reflects Japan's ultra-low interest rate levels relative to the United States and other major economies. This huge gap is unlikely to change significantly in the short term, as it is widely expected that the Bank of Japan will maintain policy rates unchanged at its meeting ending on Thursday.

Although there is still some distance to go before the low of 161.95 yen per US dollar hit in July, the recent decline in the yen prompted Japan's top foreign exchange official, Atsushi Mimura, to warn last week that he is monitoring the exchange rate trend with greater urgency. At 8:40 am Tokyo time, the trading price of USD/JPY is 152.82.

James Salter, founder and chief investment officer of Zennor Asset Management, said, "In the short term, this is not good for the market. The yen may further weaken, reigniting concerns about 'carry trades' in August

Meanwhile, since reaching a historic high in July, the Japanese stock market has been struggling.

Japan implements a parliamentary cabinet system. Although the Constitution does not stipulate that a majority is required for the election of the House of Representatives to govern, the ability of the ruling coalition to have a majority of votes is an important criterion for judging whether they hold the discourse power in parliament, as both the Prime Minister's nomination election and the majority of parliamentary resolutions require a majority of votes.

Japanese media analysis suggests that in the face of a disastrous election result, Japanese Prime Minister and Liberal Democratic Party President Shigeru Ishiba may face accountability, and whether Ishiba can continue to maintain his political power has become a focus.

Early Monday morning, the Secretary General of the Liberal Democratic Party of Japan, Hiroshi Moriyama, said, "This is a very difficult period, and we will try our best to prevent chaos in the national government. We hope to continue to do a good job in this year's supplementary budget and next year's budget

Gary Dugan, CEO of Global CIO Office, said, "The market prefers the current coalition government to win the election. International investors just want to see the corporate sector continue on the path of restructuring without any political noise

Chiyo Takatori, an analyst at Daiwa Securities, said last week that defense stocks might be hit because they had risen in anticipation of the increase in security spending from Shipaoka.

Sumitomo Mitsui DS Asset Management analyst Katsuhiro Ichikawa previously stated in a report that "if the ruling party loses its majority of seats, political uncertainty will increase significantly." He believes that the Nikkei 225 index "may fall significantly.

Renowned investment bank Barclays also predicted that if the election results were even worse, the alliance between the Liberal Democratic Party and the Komeito Party would lose too many seats to form a government, and the Nikkei 225 index could plummet by 5%.